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Louisiana-Pacific Corporation (LPX - Snapshot Report) recently entered into an agreement with Canfor Corporation to acquire the latter’s 50% share in the Peace Valley Oriented Strand Board (OSB) mill, which both the companies jointly own. Louisiana will pay $75 million for this mill and will thereby become the sole owner.

The Peace Valley mill is located in Fort St. John, British Columbia. As part of their joint ownership, Canfor provides labor, raw materials and administrative services and Louisiana gives operational support. The Peace Valley facility can manufacture up to 820 million square feet of OSB.  The products are sold under the LP brand name. After the completion of the acquisition, Canfor will continue to provide raw materials and carry on administrative services during the transition period.

The Peace Valley acquisition will strengthen Louisiana’s OSB segment, which manufactures and distributes OSB structural panel products. Sales in the segment grew 63% to $227 million in the third quarter of 2012 owing to an increase in housing activity.

During the third quarter of 2012, Louisiana’s OSB segment witnessed volume growth of 11% attributable to an improved housing market and a pricing gain of 50% owing to strong performance of OSB. The segment recorded operating income of $49 million, attributable to pricing benefits in the quarter, compared to a loss of $16 million in the prior-year quarter.

A peer of Potlatch Corporation (PCH - Snapshot Report), Louisiana-Pacific is optimistic about increasing construction activity and overall price appreciation in the housing market. However, the company is cautious about the slow global macroeconomic conditions, uncertainty of the US economic recovery, sluggishness of the remodeling industry, the European crisis and slowing Chinese market.

Our Recommendation

We appreciate the growth in price and volume, exhibited by the OSB segment and expect segment volumes to grow in the near future. The recent acquisition will add to the growth of this segment and help the company take advantage of the housing market growth.

We currently have an Outperform recommendation on Louisiana-Pacific. The stock carries a Zacks #2 Rank (short-term ‘Buy’ rating).
 

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